LONG CALL BUTTERFLY STRATEGY
Long call butterfly Strategy is created by combining call options only. In Long Call Butterfly Strategy, the first position in the money call option is bought in one lot, the second position at the money call option is sold in two lots and the third position in the money call option is bought in one lot.
This strategy works very well when the market is in a neutral situation, in which there is no possibility of the market going down but there is also no hope of seeing much rise in the market. In the "Long Call Butterfly Strategy", the profit is expected to be higher and in comparison, the loss is less. This strategy is not at all for the volatile market and bearish market, so if there is only a slight uptrend in the market, then this strategy can be easily used.
How to make a long call butterfly strategy?
To create a long call butterfly Strategy, you have to create 3 positions in the call option with different strike prices. Let us briefly understand how to create a long call butterfly strategy, for example, we will take the help of Nifty option chain and Nifty index price.
As shown in the option chain above, Nifty is trading at 21182, and 21200 is “at the money”, where we are thinking that Nifty can go up to 21200 to 21250 levels, now we have to create a long call butterfly strategy.
In the first position we have “in the money” call options 1 lot will buy, NIFTY 21100 CALL ₹253
In the second position, we will sell 2 lots of “at the money call” option NIFTY 21200 CALL ₹183.10
In the third position, we have out-of-the-money call options one lot will buy, NIFTY 21300 CALL ₹120.65
Now here we have to calculate the premium for all three positions.
(PAID PREMIUM) NIFTY 21100 CALL ₹253 = 253*50= ₹12650
(RECEIVED PREMIUM) NIFTY 21200 CALL ₹183.10 = 182.10*100= ₹18210
(PAID PREMIUM) NIFTY 18000 CALL ₹120.65 = 120.65*50= ₹6032.50
Total Buy Position (NIFTY 21100CE+NIFTY 21300CE) 12650+6032.50= ₹18682.50
Total sell position 16800 (NIFTY 17900 CALL 2 LOT) = ₹18210
Total Premium Paid = Total Buy Positions – Total Sell Positions
= 18682.50-18210=₹472.50
The total premium we have paid to create the position can result in a maximum loss of ₹850 if the market falls or the market moves higher.
Now let us see where we can get profit, for this, the payoff graph is shown below.
According to the pay-off graph, Nifty at the time of expiry was 21200 which means you sold 2 lots in “at the money” option. The market should be closed there, only then you will be able to make a maximum profit because the price of “at the money” call option will also become zero. Due to this, we will get the full money for “at the money option”, but we will have to pay ₹6032.50 for the money of “out the money” option, we will remain in ₹12650 positive and the price of “in the money” option will also reduce by 20-30%, due to time decay, which we will get ₹4600. ₹4600 will remain in profit only. So, in this way, by using the long call butterfly strategy in a small bullish market, a big profit can be made with a small loss. As in this, there is a profit of ₹4600 on a loss of ₹383.
How much money will be required?
It may cost ₹40000 to ₹45000 to create a long call butterfly strategy, as shown in the screenshot.
